Why A China Crash May Be Imminent

Those silly enough to believe that China’s economy has “recovered” should at least been given some pause by this week’s events. For China surprised the market with moves to reduce liquidity in the banking system and curb the property market. Clearly, the government is worried about the re-appearance of bubbles due to excessive credit growth. And they should be worried because it’s obvious that the bubbles which caused China’s slowdown never went away. In fact, they’ve gotten worse from government stimulus designed to prevent a hard economic landing. These government actions have made the chances of an imminent China crash more likely.

Double, double toil and trouble

Just when the world had bought into a Chinese economic recovery, along comes the government throwing proverbial spanners in the works. Actually, they’re more like grenages.

According to Bloomberg, China’s central bank has drained Rmb910 billion (US$145 billion) from the banking system this week, a record high weekly net drain. Reducing liquidity after Chinese New Year is normal, as is increasing liquidity prior to this holiday. But the extent of the liquidity reduction dwarfed the Rmb 662 billion added before the New Year. To put this in some context, the People’s Bank of China has now drained a net Rmb548 billion from the banking system this year. This compares with a net injection of Rmb1.44 trillion last year.

On top of this news came calls from outgoing Chinese Premier Wen Jiabao for local governments to impose home price restrictions and “decisively” curb housing market speculation. He described house price gains as “excessively fast” and also ordered major municipalities to publish annual price control targets. It’s obvious that the government is concerned with three things: